Market overview

FX markets opened with a modestly more constructive tone after the Beijing meeting between President Xi and President Trump helped ease some immediate pressure on risk-sensitive currencies. The absence of firm commitments limited the move, but the softer diplomatic backdrop was enough to temper haven demand and stabilise sentiment across major currency pairs.

For now, however, the dollar remains difficult to dislodge. Higher oil prices, renewed pressure at the long end of the bond market and a narrower US equity rally continue to favour USD resilience, particularly against lower-yielding and politically exposed currencies. Trade discussions were described as balanced and constructive, but with little detail for markets to price, FX attention quickly turned back to yield differentials, Fed communication and broader risk appetite.

Both leaders signalled support for a steadier US-China framework built around cooperation, managed competition, dispute control and long-term stability. China kept Taiwan firmly at the centre of its message, while President Trump talked up the prospect of the strongest US-China relationship to date.

The yuan had rallied for eight consecutive sessions ahead of the summit, its best winning streak since 2017, before easing on Friday. The move underlines the market’s willingness to reward better geopolitical tone, but also the limits of that optimism when policy detail remains thin.

USD: Fed signals in focus

The dollar remains well supported as markets weigh resilient US macro momentum, higher yields and a tougher backdrop for risk assets. This week’s US data calendar is unlikely to materially reshape the inflation debate, although the final University of Michigan inflation expectations reading for May may attract some attention.

The bigger focus will be Federal Reserve communication. Wednesday’s FOMC minutes should offer more detail on recent hawkish dissent, but speeches from Fed officials may carry greater market impact.

Christopher Waller is due to speak tomorrow and again on Friday, with the latter focused on the economic outlook. His recent remarks have leaned towards an extended pause in policy. Any shift towards keeping rate rises on the table would be significant, likely flattening the yield curve and giving the dollar another leg higher.

The broader backdrop also favours dollar resilience. High oil prices and pressure at the long end of the bond market create a difficult mix for EMFX and risk assets. Nvidia’s earnings will be closely watched this week, given the increasingly narrow advance in US equities and the recent link between equity sentiment and dollar direction.

GBP: Politics still driving the pound

Sterling came under heavy pressure last week as UK political risk moved rapidly back into focus. The possibility of a leadership challenge to Keir Starmer began to look more credible, prompting weakness in both gilts and the pound.

Initial resilience faded as developments gathered pace. Angela Rayner was cleared by HMRC, a route back to Parliament opened for Andy Burnham, and Wes Streeting’s resignation was interpreted by markets as a possible signal of leadership ambitions. The result was a sharper repricing of political risk.

The pound steadied on Friday as investors paused for clearer evidence of an actual challenge. GBP/EUR found support near 1.1450, a level that has repeatedly held since the start of the year.

UK data could still matter, but politics remains the dominant driver. Tuesday’s labour market and wage figures will feed into the inflation debate, while Wednesday’s CPI release is likely to be more important for Bank of England expectations. A stronger wage or inflation print could support sterling, but any downside surprise may weigh more heavily given that close to three rate rises are already priced by year-end.

Thursday’s PMI release will offer a first look at May activity. After last week’s stronger-than-expected GDP print, markets may be more open to upside surprises, although political risk is likely to keep sterling gains contained unless the domestic backdrop calms.

EUR: Rate differentials turn less supportive

The euro has struggled to benefit from periods of narrower rate differentials, with geopolitical uncertainty and weaker relative macro momentum limiting upside. The recent re-widening of spreads in favour of the dollar has added further pressure.

For the eurozone, the issue is that hawkish ECB pricing needs firmer economic support to remain convincing. Markets already price close to three rate rises this year, leaving limited room for further upside and greater scope for disappointment if data soften.

EUR/USD now appears vulnerable to a more bearish near-term bias. The pair has stabilised near the lower end of the 1.16 handle after four consecutive sessions of losses, but 1.16 remains a clear downside target if US outperformance persists and the Fed’s hawkish bias becomes more entrenched.

This week’s eurozone calendar includes April CPI on Wednesday and May S&P PMIs on Thursday, alongside several ECB speakers, including President Lagarde. With almost a full hike priced for next month’s meeting, investors will be watching for any signal that challenges current tightening expectations.

Looking ahead

• US: FOMC minutes and Fed speakers, especially Christopher Waller, will be key for dollar direction.
• UK: Labour market data, wages and CPI will test Bank of England rate expectations.
• Eurozone: CPI, PMIs and ECB commentary will determine whether hike pricing can hold.
• Markets: Oil, bond yields and Nvidia earnings will be important for broader risk appetite.
• FX bias: The dollar remains supported, while GBP and EUR look more exposed to political, geopolitical and data-driven repricing.